I'm referring to the fact that sterling has risen by over three per cent on its trade-weighted index since mid-March, thus confounding all the bearish talk about the pound just a few weeks ago.
This reminds me of a famous paper of Rogoff's, co-written with Dick Meese in 1983, in which he pointed out that economic models did a lousy job of predicting their movements. A random walk, he concluded, was as good a forecaster of currency moves as most models. Sterling's recent rise, in the face of good reasons to have expected a fall, supports this claim. And so it should, because this finding of Rogoff's - unlike his work on government debt - has been corroborated by subsequent research.
Or at least, it has, subject to three caveats:
■ There's some evidence - though sterling's recent recovery is inconsistent with it - that currencies, like shares, are prone to momentum effects, though it is very difficult to profit from this.
■ Although public information cannot often predict exchange rate moves, Martin Evans of Georgetown University in Washington has found that some private information, on banks' FX orders, can do so.
■ It's possible that over longer periods, such as five years or more, exchange rates do move more as economic fundamentals would predict.
These caveats, though, don't greatly undermine the key point - that exchange rates are to a large extent unpredictable.
You might think this isn't very helpful. It is. Knowing that we don't know is a big improvement on not knowing. The Meese-Rogoff finding tells us that retail investors should not base our investment decisions upon exchange rate forecasts. Granted, there might be a case for holding a foreign currency for risk management purposes - say because you're planning to buy a house overseas - but there isn't much case for doing so because you expect sterling to fall.
But it's not just investors who shouldn't rely upon exchange rates. Nor should governments, for the same reason. And yet, I fear, this is just what George Osborne has done. His claim to be a "fiscal conservative and monetary activist" and his desire (in 2010 at least) for a rebalancing of the economy towards net exports makes perfect sense in the context of a textbook economic theory - the Mundell-Fleming model. This is because this model predicts that a tight fiscal and loose monetary policy will weaken the exchange rate and so give a boost to exports which offsets the fiscal tightening. If, however, exchange rates don't behave as models predict, then this strategy breaks down.
In this sense, Mr Osborne is guilty of listening to the wrong Ken Rogoff. He paid too much attention to his discredited claim that high government debt reduces growth, and insufficient attention to his more robust finding that exchange rates are awkward beasts. But then, he's not the first politician to use academics for support rather than for enlightenment.
